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Which currency pairs are first movers in a USD ‘recovery’?

I don’t know whether DXY will reverse or not but I do know that it is now near to a decade-long previous resistance that could turn support. The longer DXY gets stuck here without breaking lower, the greater the chance it will do a retracement. In fact the longer it builds a base here, the higher a retracement could go. In this sort of situation, technical analysis expects a change of hands from sellers to buyers. The more buyers are engaged, the higher they are motivated to push.

This DXY 3M chart from 1999 ↓ was posted on 26 February and discussed in this post.

DXY 3M chart from 1999 – present

I am interested to know how major currency pairs will behave should DXY retrace higher. This is especially since there is a FOMC meeting next week on 21 March.

Based on this screen capture ↑ taken off CME FedWatch Tool page, FOMC participants expect rates to rise until 2020. This expectation is based on the median value. Consensus is not as strong as 2017. If consensus is high, the dots should fall in a tight cluster like last year and not the scattered bird droppings that we can see at the moment. In fact it gets worst next year and the year after with dots all over the place. However we could have an update or not next week especially with a new Chairman in place.

Anyhow median value of the FOMC Dot Plot expects rising rates so it is not unfair to predict that the US Dollar will have a driver to push higher.

Winners and losers in a USD recovery

Based on a daily chart, DXY bottomed on 16 February at a low of 88.25. An overlay of favourite major currencies since 16 February 2018 shows CAD as weakest against USD followed by CHF. JPY is strongest followed by SGD. There is a tight cluster in the middle (pairs with tight correlation) but CAD and CHF appear to be in a class of their own. This chart doesn’t explain why CAD and CHF are weak but if DXY were to recover/retrace, then USDCAD and USDCHF are early movers and long USD positions in these two could deliver outperformance against other pairs.

USD overlaid against favourite major currencies from 16 February to present | Source: Tradingview

Separate inspection shows USDCAD near the top of a 9-month range and could in fact be doing a double bottom W reversal. Traders have to be cautious of a fake break here but someone patient enough could wait to end of March to see how whether price closes above or below neckline by end of Q1.

USDCAD weekly line chart

USDCHF is pressed against a 10-quarter former support going back to mid-2015. Questions is whether there is a valid break higher in the lower time frame. In the daily time frame chart in the lower panel, there appears to be an inverted head and shoulders reversal.

USDCHF weekly (top) and daily candlestick charts in two panels

Should FOMC turn out to be a surprise with a downside move for DXY, USDJPY is the pair to look at.

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